Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2012 Debate
Full Debate: Read Full DebateLord De Mauley
Main Page: Lord De Mauley (Conservative - Excepted Hereditary)Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2012
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Lord De Mauley
That the Grand Committee do report to the House that it has considered the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2012.
Relevant document: 41st Report from the Joint Committee on Statutory Instruments
Lord De Mauley
My Lords, on behalf of my noble friend Lord Freud, I am pleased to introduce two instruments, which were laid before the House on 7 February. They form the final pieces of the framework for automatic enrolment. I am required to say that I am satisfied that they are compatible with the European Convention on Human Rights.
It is vital that we tackle the problem that increasing longevity brings when coupled with decreasing pension saving. Millions of people are simply not saving enough for their retirement. Automatic enrolment will, for the first time, place a duty on employers to put their eligible workers into a pension scheme. This will result in between 5 million and 8 million people newly saving or saving more in workplace pensions.
We are now very close to the start of the roll out. As my honourable friend the Minister for Pensions has said, for many of us, it is automatic enrolment rather than the London Olympics which will be the main event in 2012. We are very grateful to the Mayor of London for installing a countdown clock in Trafalgar Square so that we can count the days, hours and minutes before automatic enrolment begins for the first workers.
Your Lordships' House has debated automatic enrolment legislation for more than four years. The time has now come to bring closure to some complex issues that have vexed noble Lords in particular. The instruments that we are debating today cover two broad areas. The first is certification of money purchase, personal and hybrid pension schemes. There is quite a history to this issue, but at its heart we sought a pragmatic solution to a complex problem. It is important to start by emphasising the basics: why we wanted to provide a simple self-certification process, and how we managed to do that.
The aim of certification is to allow employers who already provide good-quality workplace pension schemes to continue to do so after the reforms have started, without having to make costly changes to their existing schemes or payroll processes because they calculate pension contributions on basic pay rather than on a band of qualifying earnings. As they will do this by self-certifying that their scheme satisfies the relevant quality requirements, we wanted the self-certification test to be as straightforward as possible. However, as my noble friend Lord Freud mentioned last year in debate on the Bill, there is a balance to be struck in this area between simplicity and providing appropriate safeguards to individual members. We believe that we now have this right. We have worked closely with employers and the industry and have listened to their concerns, as well as the concerns expressed by noble Lords.
Safeguards for jobholders were hotly debated by noble Lords during the passage of the Pensions Act 2011. After careful consideration of the concerns expressed, in particular by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, we tabled an amendment with a strong and enduring requirement for the Secretary of State to ensure that at least 90 per cent of jobholders will not lose out. The detail of how certification will work in practice is specified in the regulations that we are discussing today.
In the debate last year, my noble friend Lord Freud described a proposed approach that would provide a three-tier structure for self-certification. Under this, an employer will be able to self-certify that their scheme meets the alternative quality requirements if it requires one of the following: first, contributions of at least 9 per cent of basic pay, including at least 4 per cent from the employer; secondly, contributions of at least 8 per cent of basic pay, including at least 3 per cent from the employer—and in addition, basic pay taken in aggregate must be at least 85 per cent of total pay; or thirdly, contributions of at least 7 per cent of total earnings, including at least 3 per cent from the employer. This is the test we are providing in regulations, with fine-tuning of the detail taken on board during consultation.
Before I come to the fine-tuning, I will stress the significance of the provisions. They mean that employers who already provide their workers with a pension will be able to meet their new duties without having to make costly and burdensome changes to pension schemes and payroll systems. Crucially, I will confirm that they also meet the test that the vast majority—at least 90 per cent of jobholders—will receive at least as good a deal as they would have done had they been in a scheme where the contribution was based on qualifying earnings. Indeed, many will be better off.
When we tested the draft regulations through consultation, there was broad support for our proposals from organisations that represented employers, the pensions industry and individuals. There was particular support for striking the right balance so that we have something that works for employers while providing appropriate protection for individuals.
We heard a strong message that the definition of basic pay needs further refinement so that it provides certainty to employers. We have now provided this by explicitly excluding several allowances—as well as bonuses, overtime and commission—from the definition of basic pay. The test that at least 90 per cent of jobholders should not lose out will still be met.
Another request that we have been able to meet in response to the consultation was to extend the proposed one-year certification period to 18 months. This will enable employers to carry out the renewal of their certificate at an appropriate point, depending on their use of the waiting period and the flexibility around three-yearly re-enrolment. We have published guidance for employers and their advisers alongside these regulations, which we intend will help to explain how certification will work in practice to ensure that schemes can qualify to be used for automatic enrolment.
The second part of these instruments is aimed at ensuring that automatic enrolment will provide access to pension saving for as many people as possible by bringing in some groups of individuals who are currently out of scope. Following an amendment brought in your Lordships’ House, the Pensions Act 2008 excluded seafarers and offshore workers from the reforms. However, this exclusion was only ever intended to be temporary. Additional time was needed to resolve some very complex legal issues—in particular in relation to international maritime law and custom—that are relevant to how the reforms should apply to seafarers and offshore workers.
We have worked closely with organisations in the shipping and offshore industries, as well as with other government departments, and are now confident that we have satisfactorily resolved these issues. I am particularly grateful to the Chamber of Shipping and the relevant trade unions for their considerable input, without which we might not have been able to make this progress.
The instruments that we are debating today will ensure that both seafarers and offshore workers are covered by the reforms. For the sake of clarity, when we talk about seafarers in this context we mean people working on ships or hovercraft, but we do not include share fishermen as they are self-employed and, like all self-employed people, they are outside the scope of the reforms. Offshore workers are, broadly speaking, those working on oil or gas rigs in the North Sea.
In brief, we are now satisfied that both seafarers and offshore workers should be jobholders if they are “ordinarily working” in the United Kingdom and meet the age and earnings criteria. This means that we will treat them in the same way as those working on the mainland. This is a similar approach to that adopted for the national minimum wage. The Pensions Regulator has now provided guidance on the application of the “ordinarily working” test.
The provisions for both seafarers and offshore workers are subject to a statutory review and contain a sunset clause. We have made this compulsory for all new legislation where there is a net cost to business, and it will allow us to monitor the operation of these provisions and contribute towards our goal of transforming the role of regulation in our society.
Finally, police officers do not have employers for automatic enrolment because the police are officeholders.
Lord De Mauley
My Lords, if I may continue from where I was interrupted, I was about to say that, finally, police officers do not have employers for automatic enrolment because the police are officeholders. The Pensions Act 2008 brought police officers and police cadets into automatic enrolment by deeming them to be employed by the relevant police authority. However, police officers seconded to the Scottish Crime and Drug Enforcement Agency or the Scottish Police Services Authority had no such employment relationship because, despite its name, the Scottish Police Services Authority is not technically a police authority as defined in the legislation. These regulations correct that and extend the definition of worker for automatic enrolment to these two groups of police officers. I commend these instruments to the Committee.
Baroness Drake
My Lords, as I was strolling to this Committee this afternoon, a noble friend stopped me and asked where I was off to. When I advised him that I was off to deal with some statutory instruments, he said to me, “I hope you sit quietly and say very little, as we do in the Commons”. I gulped quietly as I held in my hand my 10 minutes of detailed script. I did not know whether to feel admonished or what. I told myself that our role is to scrutinise, so I hope that noble Lords will bear with me and allow me to go through the issues that I want to raise and ask questions on.
As the Minister has said, these regulations set out the alternative quality requirements. I acknowledge the amendment made by the Government to Section 12 of the Pensions Act 2011, and I accept that considerable work and thought have gone into drafting these regulations. Nevertheless, I remain anxious because, as the Minister has said, the main purpose of the alternative quality requirement test is to give an easement to good employers with good DC pension schemes to encourage them to retain those schemes. This makes good sense and one would not want to undermine the continuation of good existing provision. That sits full-square with the public policy intentions. However, the alternative quality requirements—and this is what makes me anxious—should not enable bad employers to leverage self-certification to avoid their responsibilities.
On the form of certificate showing that the alternative quality requirements are satisfied, the requirements, particularly the facility to use the alternative test for part of the scheme or only for some jobholders, give rise to the potential to leverage the regulation to reduce auto-enrolment costs, for example where high and low earners are grouped together and/or where non-basic pay makes up a very significant proportion of earnings.
I welcome the requirement in the regulations on employers to provide information of both the names and the roles of the relevant jobholders where the certificate relates to only some of the jobholders, because they should assist in identifying bad behaviour, particularly as the Secretary of State has a responsibility to review the strength of the alternative certification test. I would welcome the Minister confirming that the findings from the Secretary of State’s review of the alternative certification requirements will be published prior to the wider 2017 review of the pension reforms as a whole.
I also ask the Minister about trust-based scheme with trustees and rules. Will the trustees bear any responsibility on the matter of whether the employer’s scheme or part of the scheme can satisfy the alternative quality requirements? If the answer is yes, will that also apply to trustees of multi-employer schemes and master trusts?
As for the renewal of the certificate, the employer has to assess on renewal whether during the past or future certification periods, the quality requirements were or will be met. Where an element was not met—in the past tense—the employer must consider what action needs to be taken to ensure that does not happen in the future. That requirement is welcome for future certification periods, but my question to the Minister is this: if it is revealed that a jobholder who should have been auto-enrolled was not auto-enrolled, or where some one receives an employer contribution lower than it should have been under the relevant quality requirements, will there be a legal requirement on an employer to notify the jobholder and to make good their employer contribution?
On the alternative requirements themselves for money purchase schemes and likewise for other schemes, I remain concerned that the first and second tests provide for pensionable earnings to be equal only to basic pay. For good employers, where basic pay makes up a significant proportion of earnings, a minimum of 4 per cent of employer contribution is clearly going to be a good base load. However, where basic pay forms a significantly lower proportion of their earnings, I remain concerned about abuse, particularly when that is taken with the explicit acceptance that there can be a 10 per cent shortfall in contributions for those who lose out.
I welcome the fact that a scheme is not to be treated as meeting the relevant quality requirements where the regulator is of the view that there are no reasonable grounds to do so and the regulator can issue compliance notices on employers where there is a shortfall in contribution payments or a failure to meet an alternative test. When the regulator issues a compliance notice on an employer, and a relevant jobholder during the certification period has since ceased to be employed, will the employer still have to make good any shortfall in respect of that now ex-employee or ex-jobholder?
As to the definitions in the regulations, the definition of basic pay lists all those payments and allowances that can be disregarded. The assumption in the drafting is that these additional payments are paid in addition to basic pay, so it is straightforward to disregard them. Sometimes such allowances are given in substitution of basic pay, so if you have salary substitution, basic pay is forgone in exchange. The employer meets the cost of an expenditure, resulting in savings in NI and tax, often for both parties. The use of salary substitution has grown exponentially and we see it being applied to such varied items as pension contributions, the provision of cars, computers, bicycles, and childcare vouchers, to name a few. In such situations it would not be unusual for an employer to have pay records that track two basic pay entitlements for a jobholder: one that applies post-salary substitution; and one that applies when salary substitution ceases or when pay rises are awarded. Will the Minister say whether consideration has been given to how the definition of basic pay will apply in certification requirements when an employer uses salary substitution?
With regard to giving a certificate and its retention and disclosure, the regulations—clearly a good thing—allow for a relevant jobholder or a recognised independent trade union to request and receive a copy of that certificate within six years after the end of the certification period. Does the relevant jobholder have to be a jobholder at the time of making the request, or is it sufficient to have been a relevant jobholder during the certification period? If a request is made during the certification period, must that request also be met by the employer? I welcome the decision to extend the coverage of the new employer duty to seafarers and offshore workers. I read the impact assessment in detail, which sets out clearly the complexities that had to be dealt with and how the regulations have sought to address those. I am very pleased that that decision was made.
I take this opportunity to refer to the Automatic Enrolment (Miscellaneous Amendments) Regulations 2012. It is a negative instrument but it addresses the important matter of the schedule of information to be provided in a notice from the employer to defer automatic enrolment to the end of a waiting period and in respect of the automatic enrolment information provisions generally. As all of us who believe passionately in pensions recognise, automatic enrolment turns inertia into a positive, and anything that undermines that beneficial inertia will undermine persistency of savings. How the opt-out procedures operate in practice will be pretty key to the success of the reforms and participation rates. It is clear, which I can see from my own experience, that good employers will take the opportunity of auto-enrolment to review positively their pensions proposition for the new generation of employees. There is clearly plenty of evidence there.
Subtleties in the employer behavioural response to regulation, particularly negative behaviour, always surprises policy-makers. They always miss some key behavioural responses. Jobholders in high-turnover occupations will be particularly vulnerable to the subtlety of employer responses to these regulations. For example, nothing in the regulations prevents employers giving several reminders of the opt-out dates to jobholders during the waiting period, and clearly the implicit intent is to increase opt-out rates. The impact assessment helpfully refers to the DWP’s intention to issue a template for generic and tailored information to be provided by employers. If the information provided to jobholders is significantly different from the template, will that be considered a breach of the regulations?
Lord De Mauley
My Lords, as is always the case with pension reform, it has been a more than interesting and lively debate. The comments of noble Lords have been insightful and helpful and I thank them for those.
These reforms are designed to transform the culture of saving for retirement in our country. Automatic enrolment is a bold start, but we have also begun looking at how to improve transfers to deal with small pension pots, a point raised by my noble friend Lord Boswell, and the industry is looking at issues around the transparency of charges. Both these issues were debated in your Lordships’ House during the passage of the Pensions Bill. On transfers and small pots, our consultation closes next week and we will publish a response in the summer. The Pensions Regulator has also recently published a document on what a good direct contributions scheme looks like in order to help employers to select an automatic enrolment scheme.
I will now do my best to wade through the large number of important questions asked by noble Lords. I will start with a question raised quite late in the day by the noble Lord, Lord McKenzie, because it sets the tone of the debate. It concerned the 10 per cent of jobholders who might lose out. Employers who are aiming to meet the minimum requirements under the law are unlikely by definition to use self-certification. Those using it will tend to be those seeking to run a scheme that is at least as generous as, and probably more generous than, a statutory minimum scheme for at least 90 per cent of their workers. We are talking about employers who see the provision of pensions as an important benefit for their workers. We want to allow such employers some latitude, or we may end up losing these more generous benefits for many workers. Therefore, because members will be in a comparatively generous scheme, the risk that they will lose out to a significant extent will be small.
The noble Baroness, Lady Drake, asked a lot of pertinent questions. They were fairly technical and I want to make sure that I address the right question in each case, so I may write on a number of them. I will attempt to answer as many of them as I can. She asked about the publication of the assessment certifying that the conditions of the 90 per cent test are still being met. That will be published in 2017. She asked whether, if an individual has a shortfall, the employer will be required to make it up. If the employer has miscertified when he should not have done so, the Pensions Regulator will have powers to end the certificate and require the employer to make up the shortfall.
The noble Baroness asked about waiting periods and re-enrolment. An employer cannot use a waiting period in relation to re-enrolment so the problem of multiple waiting periods will not apply. She asked about the use of self-certification for certain groups of jobholders and suggested that the system could lead to abuse. What I might term “good” employers told us that they needed flexibility in how they applied the certification test. We will monitor the use of certification as part of the evaluation of the reforms. If we find that employers are abusing certification, we will have the power to change the scheme and ultimately repeal it by order if necessary.
The noble Baroness, Lady Drake, and my noble friend Lord Boswell asked about the issue of salary sacrifice. The definition of “earnings” in the Pensions Act 2008 is,
“earnings payable to the person”.
If an individual chooses to sacrifice part of his or her salary, it is no longer “payable” and therefore not part of earnings, so the employer contribution would be payable only on the residual earnings. I will consider the point made by my noble friend Lord Boswell.
The noble Baroness, Lady Drake, asked about employer behaviour and increases in the opt-out rate—effectively, not following the template. The statutory requirement is to provide the prescribed information. There is no statutory restriction on providing additional information, but putting pressure on a worker to opt out is unlawful. Employers will need to be careful that they do not overstep the pressure test, even implicitly, by applying pressure to their workers.
My noble friend Lord German asked about the issue of “ordinarily working” in the context of seafarers. There are several factors a court is likely to consider in deciding where a seafarer is based and therefore whether they are ordinarily working in the United Kingdom. Where they join and leave the ship is just one of them. Other factors can be taken into account, such as the terms of their contracts. Offshore workers are deemed to be ordinarily working in the United Kingdom if they are working on the UK continental shelf or working on the UK part of a cross-boundary field. For offshore workers, the start and end of a journey does not matter.
My noble friend Lord German also asked about powers to cap charges. The Government have taken powers to place restrictions on charges in pension schemes. However, charges are not currently high in default schemes. They are typically in the range of 0.4 to 0.6 per cent. The industry is responding and a code of practice on transparency of charges is planned. We do not propose to regulate without evidence that it is necessary, but we will if there is evidence of a problem.
Baroness Drake
I am not sure when the Minister is going to finish and do not want to miss the opportunity to—
Baroness Drake
I was rather disconcerted when I discovered the implications of the interrelationships between earnings payable and how that applies under the salary substitution. A good employer simply has a shadow basic pay and pays pension contributions on that. I have not had an opportunity to go through whether there is a relevant hook in the schedule information, but the Minister should consider how this issue is brought to the attention of employees as they may simply not be aware of the implications for their pension contribution rights of taking on excessive amounts of salary contribution on a cumulative basis. The Minister did answer my question about employers having to make good the shortfall. I am particularly interested in whether they have to make the shortfall good where that employee has left and how they would do that. I am happy to have that in writing.
Lord De Mauley
My Lords, I understand both the questions. I am grateful for the noble Baroness’s acceptance that I should write because I need to consider the questions carefully before I answer them.
My noble friend Lord Boswell asked about a worker returning overseas with a small pot. The waiting period of three months will allow for workers such as summer workers, who work for a relatively short period, such that the issue does not arise. However, the problem of what I might call stranded pots is a real one. The Minister for Pensions is currently considering this for United Kingdom workers and I will pass my noble friend’s comments about overseas workers on to him so that he can take it into account in his deliberations.
The noble Lord, Lord McKenzie, asked about the automatic enrolment rates for next year. The amounts for the automatic enrolment earnings trigger and the qualifying earnings band are subject to annual review. We have consulted on proposed thresholds for next year and are considering the responses. We aim to publish the response and announce the rates for 2012-13 soon, which is coded language that I think the noble Lord will understand.
The noble Lord also asked about the legal process to access the tribunals for offshore workers. I am going to have to write on that as I am on access to tax relief on personal pensions. He asked about the profile of the 10 per cent who may lose out from certification. I think I have covered that already but should add that we have examined the matter to ensure that our measures are not discriminatory. I suspect that when I am writing afterwards I might discuss that issue in some more detail.
I will, of course, look at the record to see whether there is anything else that has not been addressed. As I said, these provisions put in place necessary pieces of the automatic enrolment framework which will enable employers to comply with the new duties. This will protect existing, good-quality schemes while also providing ongoing protection for job-holders enrolled in them. We are also ensuring that these reforms bring on board individuals who are ordinarily working in the United Kingdom, regardless of whether their work is on land or at sea. I commend these instruments to the Committee.